As the latest bull market continues, it may seem as if now is not a time to worry about whether to sell penny stocks. While mega-cap tech stocks have been some of the most high-profile strong performers in recent months, many low-priced ($5 per share or less) speculative growth stocks have been crushing it as well.
However, while some analysts may argue that the stock market will steadily keep rising as current macro challenges enter the rearview mirror, the risk of today’s bull market ending up being a “bull trap” remains.
Sure, inflation keeps cooling. The Federal Reserve may still be planning to raise interest rates once or twice more, but if inflation keeps falling down towards the Fed’s 2% target, the much-awaited “Fed pause” (or even better, “Fed pivot”) could arrive sooner-than-anticipated.
Then again, as a Morgan Stanley market strategist argued last month, the market has become pricey as investors dive back in out of FOMO. It’s possible that the market has gone overboard with its sentiment shift. This could correct, affecting riskier stocks to a greater extent.
With this, selling penny stocks, especially more speculative names like these seven, seems to be the best move right now.
AMC Entertainment (AMC)
Admittedly, former “meme stock” all-star AMC Entertainment (NYSE:AMC) hasn’t benefited from the latest bull market. In fact, shares in the movie theater chain have actually declined in the past month, largely due to the ongoing “APE conversion saga.”
Traders continue to short AMC stock, betting that the conversion of AMC Entertainment Preferred Equity Units (NYSE:APE) will go through. Yet while AMC could benefit from a short-squeeze, in the event a Delaware Chancery Court sides with dissident shareholders who are against the conversion, that’s far from a guaranteed outcome.
As InvestorPlace’s Eddie Pan reported on March 13, Roth MKM’s Eric Handler and Citi’s Eric Bazinet think otherwise. Both analysts believe the deal will go through. With Handler and Bazinet setting price targets of 50 cents and $1.65 per share, respectively, far below AMC’s current stock price, consider it one of the penny stocks that could damage your portfolio.
Matterport (MTTR)
The popping of the “metaverse bubble” pushed Matterport (NASDAQ:MTTR) to as low as $2.20 per share, but in recent weeks, speculators have been wagering on a comeback for this digitizer of the physical world.
Yet while last month, I was arguing in favor of buying into the MTTR stock comeback story, giving the situation a second look, I’m now on the other side. Even as recent news of mass layoffs at the company bodes well regarding a path toward profitability, as a Seeking Alpha commentator has argued, this doesn’t solve Matterport’s growth problem.
Per the commentator, until the company begins to report a higher subscription growth rate, the MTTR rally will likely stall. That’s not to say you must exit ASAP, ahead of a severe reversal. However, if you’re looking to sell penny stocks into strength, be sure to include this one.
Nikola (NKLA)
On July 13, Nikola (NASDAQ:NKLA) shares spiked higher on news of the electric truck maker locking down a major customer (hydrogen gas producer BayoTech). Yet, while Nikola is making commercialization progress, this is small progress at best.
That is not the sort of news that justifies a more than 60% move higher for NKLA stock in the span of a day. Those already holding NKLA should book the win by taking profit, but those who do not own it, consider it one of the penny stocks to avoid.
Even as this rally could continue in the immediate term, long-term prospects for Nikola shares are still murky. In order to keep growing/potentially reach profitability, the company likely needs to raise billions in additional capital. Nikola could finally prevail next month in getting shareholder approval to sell/issue additional shares. However, the resultant dilution could water down long-term returns.
Opendoor Technologies (OPEN)
Rising hopes that the housing market is stabilizing have propelled Opendoor Technologies (NASDAQ:OPEN) significantly higher in recent months. At the start of the year, shares in this iBuyer (large-scale house flipper) were deep in penny stock territory.
Since then, however, OPEN stock has rallied by the tune of 339%, from $1.10 to $4.83 per share, placing it just below the penny stock ceiling. This strong performance has made it a big winner for some speculators, but much like some of the names listed above, strong performance may not necessarily continue.
Why? As I recently argued, the U.S. housing market isn’t out of the woods regarding the risk of a crash. If residential real estate prices come under severe pressure, it may lead to a serious reversal for Opendoor shares. With this, add OPEN to your “sell penny stocks into strength” list.
SmileDirectClub (SDC)
As recently as May, SmileDirectClub (NASDAQ:SDC) shares were languishing in the stock market graveyard. Since then, though, shares in this former “meme stock” have more than doubled in price. A big factor behind this run-up has been news that the clear aligner therapy treatment provider is starting to expand its operations for the first time since the pandemic.
But not only is there uncertainty about whether this expansion will lead to stronger fiscal results for the company. Speculators are jumping into SDC stocks in pursuit of big profits. However, as InvestorPlace’s Chris Markoch pointed out last month, insiders are sitting on the sidelines.
Although not certain, this lack of insider buying may signal something. That would be a lack of confidence among SDC’s C-suite regarding the struggling firm’s comeback potential. One of the high-risk penny stocks, consider it best to follow management’s lead and skip out on buying.
Virgin Galactic (SPCE)
Virgin Galactic Holdings (NYSE:SPCE) trades at a far cry from loftier price levels achieved when special purpose acquisition company (or SPAC) stocks were all the rage. However, shares in this space exploration play have inched up lately.
While this recent SPCE stock rally hasn’t been as significant as those experienced by more volatile penny stocks, perhaps some retail traders are curious whether Virgin Galactic has a shot at going “to the moon” once again. My view? Not so fast!
There’s a good reason why short interest (26% of float) remains high with this pre-revenue company contending with heavy cash burn. Virgin Galactic is replenishing its war chest with at-the-market (or ATM) equity offerings. Even after raising $300 million last month, SPCE wants to soon raise another $400 million. The resultant dilution from this is likely to limit the chance of any “return to the moon” for shares.
Vroom (VRM)
Vroom (NASDAQ:VRM) has zoomed out of the market junkyard since June, rising by nearly 180% during this time frame. However, shares in the online used car retailer have only spiked in response to recent price action with Carvana (NYSE:CVNA), Vroom’s larger peer.
Contrarians have been using promising news out of Carvana as justification to bid up shares, causing a short squeeze. Investors have, in turn, bid up VRM stock on the view that, like CVNA, past concerns about the impact of a used car market downturn were overblown.
Yet when (not if) the squeeze in CVNA dissipates, expect attention with VRM to turn back to its fundamentals. When this happens, shares could experience a big reversal. Why? The company is experiencing cash burn problems that are as bad, if not worse, than Carvana’s. One of the unstable penny stocks, sell VRM if you own it.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.